When fund manager Schroders Investment Management Australia launched its Real Return Fund in 2008, it set a target annual return of CPI plus 5 per cent. It has largely achieved that.
After assessing the outlook for global share markets in 2020 and beyond, Schroders has cut its equity allocation in the fund.
The Real Return Fund has produced an average return of 6.7 per cent a year since it was launched in 2008. Inflation over the period has been an average of 2.2 per cent a year.
Over the past three years, the average return has been 5 per cent a year, while inflation has been 1.7 per cent a year.
The fund is low risk, with a standard deviation of 2.5 per cent a year over the past three years.
The fund’s maximum loss (excluding the GFC) was 2.5 per cent, between April 2015 and February 2016.
In the December quarter of 2018, when there was a big global equity market sell-off, the fund was down 2.1 per cent.
The fund is currently underweight equities, with a 25 per cent allocation, including 11.1 per cent Australian equities. The Australian market is its preferred equity market and the US equity market its least preferred.
Schroders Investment Management Australia head of multi-asset, Simon Doyle, says that after a benign 2019, volatility is back on the agenda.
Doyle says: “Central bank support, most notably the US Federal reserve, made 2019 a better year than it had any right to be. This pushed many geopolitical concerns into the background.
“The consensus is that central banks will continue to bail out investors, and as long as interest rates remain low, markets will be supported.”
Doyle says equity market valuations are “problematic” but it ranks the local sharemarket as the one with the highest expected return and the lowest probability of loss.
“It is not a cheap market but the earnings yield less the bond yield is positive and the dividend yield less the bond yield is positive. Investors looking for income will invest in domestic equities. Prices are high but not ridiculous,” he says.
The fund is neutral on credit and underweight bonds. Fifty-eight per cent of the portfolio is in defensive assets, including 10.8 per cent in Australian corporate bonds, 6.9 per cent in Australian government bonds and 7.5 per cent in global corporate bonds.
Cash and “cash equivalents” make up 23 per cent of the portfolio.
It has 16.8 per cent in what it calls “diversified’ assets, including high-yield credit, Asian credit and emerging market bonds.
Longer term, Doyle worries about the level of valuation support sectors like infrastructure, private debt and commercial real estate are getting from low rates.